Budgeting with a mortgage
What does taking on a mortgage mean for your budget?
Once the excitement of buying your first property has subsided, reality dawns: you are now in possession of what is probably the largest debt you have ever had. Your mortgage.
Unless you bought your place with a healthy deposit, taking on a mortgage will mean big financial changes, says Robert Drake, senior executive, financial literacy, at the Australian Securities and Investments Commission’s (ASIC) MoneySmart.
“The long-term rewards [of a mortgage] are great, but you need to keep that in mind,” Drake says. “For most people, it will feel like a big leap.”
For the uninitiated, here are Drake’s tips to make the transition from rent-payer to mortgagee as smooth as possible:
Know how much can you afford
Work out how much you can afford to borrow before you borrow it.
“When people are looking to buy, they should use a mortgage calculator to work out how much they can afford to borrow based on what repayments they can afford,” Drake says. “If you start with what looks like a nice house and work backwards from there to the repayments, you could well be in over your head.”
Once you have worked out that you can live on, say, $200 a week, try before you buy.
“Actually put living on $200 a week into practice before you take out the mortgage,” Drake says.
When calculating your budget, don’t forget to add in the extra costs involved in property ownership, such as council rates, home insurance, water repairs and electricity repairs.
“These are things you don’t have to pay when you are renting,” he says.
Keep a close eye on your budget
Once the mortgage repayments are up and running, keep a tight rein on your finances in the first few months.
“It may take a few months for you to get a handle on what the costs are, i.e., how big is the water bill going to be?” Drake says. “What are the council rates?
“Most people are going to have to live with their belts tightened for the first few years, but life can still be fun. As time goes by it starts to feel like less of a burden.”
Resist the temptations that accompany moving into a new home. Like buying a whole new household full of furniture, for instance.
“It’s easy to spend extra money that you can’t really afford,” Drake says. “Don’t use credit if things are feeling a bit tight, or to paper over the problem. You can never borrow your way out of a debt problem.”
Communicate with your bank
If problems do arise, such as an unexpected health concern or the loss of a job, talk to your bank early, Drake says.
“The earlier you talk, the more options you will have. It can be a horrible situation to be in, and people can get very stressed out.
“But banks have become much better at finding solutions and it’s in their interests to find a solution as well.”
Commonwealth Bank mortgage holders should contact their lender or broker to discuss repayment concerns.
Things to know before you Can: The advice contained in this article is for general information purposes only and may contain general advice. It has been prepared without considering your objectives, financial situation or needs. You should, before acting on the advice, consider its appropriateness to your circumstances. Commonwealth Bank of Australia ABN 48 123 123 124.